RITM Buys Out SCU, Q2 Early Earnings, Potential Trades

Rithm Capital (RITM) announced the pending acquisition of Sculptor Capital (SCU) and provided preliminary Q2 2023 results.

Scott Kennedy prepared a same-day evaluation of RITM’s preliminary Q2 2023 figures.

Hi subscribers. I was able to review RITM's Q2 2023 preliminary earnings results that were disclosed earlier today (along with the company’s proposed acquisition). RITM reported an estimated BV as of 6/30/2023 of $12.13 – $12.19 per common share (3.9% - 4.4% increase) versus my prior projection of $11.60 per common share (0.6% decrease). I consider this a modest (at or greater than a 2.5% but less than a 5.0%) mean outperformance and will likely be very slightly OUTSIDE my $11.10 - $12.10 per common share range.

As such, a very nice quarterly BV performance from RITM. RITM continued to briskly expand some smaller sub-portfolios which very likely grew both quarterly BV and had a positive impact to core earnings. This includes, but is not limited to, RITM’s business purpose lending (“BPL”) and single-family rental (“SFR”) sub-portfolios.

Moving on, RITM’s adjusted core earnings (or “earnings available for distribution” [EAD]) is estimated to be in a range of $0.390 - $0.450 per common share for the second quarter of 2023. This excludes a one-time benefit of $0.200 per common share in direct relation to the sale of some excess mortgage servicing rights (“MSR”) during the quarter. This is classified as a “capital” transaction and is reversed out of taxable income (and deferred over the remaining life of the applicable investments). Even when based on RITM’s adjusted core earnings, this range was a modest - notable outperformance versus my prior projection of $0.350 per common share. RITM’s core earnings (no adjusted core earnings last quarter) was $0.354 per common share for the first quarter of 2023. As such, I projected a core earnings decrease of ($0.004) per common share. In actuality, RITM reported a projected core earnings increase of $0.036 - $0.096 per common share. The institutional analysts’ consensus average was core earnings of $0.355 per common share. As such, the institutional analysts’ consensus average was fractionally more accurate when compared to my projection. That said, RITM beat both set of projections by a good margin which is a positive catalyst/trend. At this point in time, I cannot “drill down”/reconcile this adjusted core earnings outperformance (not enough information was provided today).

Regarding RITM’s announced proposed acquisition of Sculptor Capital Management (SCU), currently this is just one of those events you have to trust management knows what they are doing. I am unfamiliar with this specific company and it will take time to get a full sense of their managerial team and the investments they own (including modeling; just being honest). I will say this proposed acquisition is likely going to remain “at the parent level”/not be part of the aforementioned NewRez spin-off that could take place in 1 week or 1 year (or possibly not at all since RITM has tried to spin-off NewRez for years now). I believe the main takeaway is better-run and/or growing mREITs have recently been taking the opportunity to “gobble up” some decent investments at historically attractive – very attractive pricing. I see no current reason why this is not the case with RITM’s proposed acquisition/disclosure today. Yes, some could argue this is not a “core” RITM asset class (however, in the ballpark outside the leveraged loans and structured credit [CLOs, CDOs, ABLs]) but management has shown in the past they are not shy acquiring new assets/investments that can provide attractive risk-adjusted returns. SCU’s managerial team will generally remain in place post-acquisition (which is probably a positive due to the diverse array of investments).

When taking RITM’s recent and projected performance into consideration, along with macroeconomic trends/events (mainly Fed monetary policy, the general projected movement of rates/yields, projected economic performance over the foreseeable future), no change to my/our RITM PERCENTAGE recommendation ranges (relative to CURRENT BV) or risk rating (remains tied at a sector-best 3.5). That said, due to RITM’s modest 6/30/2023 BV outperformance, I/we recently performed a CURRENT BV “true-up” adjustment which raised the company’s per share recommendation ranges by approximately $0.55 per share. This true-up CURRENT BV adjustment is already reflected in the Google subscriber spreadsheets.

We also provide a quick card to help investors evaluate their earnings.

Note: Values are still preliminary. They aren’t set in stone, but management’s estimates are generally very accurate because they have access to more data.

We also have cards for Q2 results from AGNC, DX, and ORC before the potential trades: